In The Lead – The Higher They Climb…

It was bond sale time again in Europe this morning, but an offering by Italy fell short of the reception that Spain’s auction met with on Thursday. Thus, some of the enthusiasm on display yesterday dissipated a bit this morning and the dollar was seen fast approaching the 81.50 level on the trade-weighted index while other assets (gold included) headed lower amid profit-taking. The euro fell to the day’s lows after the auction.

A potential six-month delay in the EU’s embargoing of Iranian crude oil made for quite a reversal in that commodity’s price yesterday and black gold was still trading near $99 per barrel this morning. Oil is on course to now mark its largest weekly fall in one month (near 2.3%) despite tensions with Iran still on the radar and despite Nigeria’s five day-old general strike supporting the opposite trend.

Some investor nerves were also rattled by the "suggestion" by two German lawmakers that Greece’s departure from the euro might not be a cataclysmic event at this juncture. The ECB left rates untouched yesterday but investors were focusing on the fact that its head, Mr. Draghi, basically said that the three-year loan scheme (of near half a trillion euros) is what has prevented a credit "event" in Europe.

He also noted that "substantial downside risk" to growth remains manifest in the region. Most market observers are all too aware that it is now Europe’s turn to deleverage as it carried a higher total public and private debt load (at 444% of regional GDP) than the US when it began a similar process. De-levering often leads to deflation raising its ugly head (complete with the prospects of social upheaval).

This morning’s window-rattling news once again emanated from Europe: it was related to fresh speculation that a ratings downgrade (target(s): unidentified) is in the works at one or another rating agency. The news was enough to send the greenback soaring at the 9:30 hour in New York (it rose by a full 1.0% to 81.58 on the index). So much for the "risk-on" trade that appeared to flourish for a few days prior to today…

The downgrade rumor also sent the Dow down 90 points right at the opening bell. In domestic news, the US trade deficit widened more than it was anticipated in November as exports fell and as imports of autos and oil climbed. On a positive note, the US hiring deep-freeze appears to be finally breaking up as economists now estimate that more new American jobs will be created in 2012 than at any time since 2006. Along with more jobs being created, US paychecks are also expected to become slightly plumper (emphasis on: slightly).

Spot precious metals dealings opened the week’s final session with lower prices across the boards and then went lower still. Gold fell $18 and was quoted just above the $1,630 bid level per ounce while silver dropped 70 cents to touch $29.55 per ounce. Platinum and palladium declined between 1.4 and 1.9 percent with the former losing $22 at $1,480 and the latter slipping $11 to $625 the troy ounce. Here’s a headline you did not expect to run across very often, if at all: "India Dumping Gold and Moving to Bonds."

That is not a typo; locals are selling their bullion and placing it into sovereign debt instruments (!) Part of the explanation may be found in India’s (finally) easing inflation levels but the remainder can mainly be attributed to gold prices that remain unpalatable to the country’s would-be investors. The BBA (Bombay Bullion Association) warns that India’s appetite for gold could experience a 25-30 percent contraction this year if prices remain where they are or have been recently.

Some of the bullishness so pervasively on display in gold in the first two-thirds of 2011 has also been tempered by the increased volatility and several plunges in price that the yellow metal has experienced since touching levels above $1,900 last fall. While not too many expect net annual declines in gold’s value this year, there is one school of thought that foresees some bumps ahead for bullion as fresh bullish price drivers have been rather difficult to come by lately.

Long-term insurance-oriented allocators may not have a lot to fret about but Xenon Group CIO Jay Feuerstein warns that he does not "think (gold) will be the slam dunk that it has been," and that "short-term gold speculators are likely to have a tougher time with the metal this year."

Also, do take note of the potentially lessened need for gold by Chinese individual investors now that inflation pressure in that country is also showing signs of easing (see our article yesterday). While inflation is falling, some have jumped way ahead of themselves and have declared that monetary easing courtesy of the PBOC is next on the menu. Apparently, that is not the case just yet, judging by today’s decline in local stock indices (the SGE fell 1.3%) which reflected the realization that tight liquidity measures will not be abandoned any time soon by the government.

China appears to also be losing some amount of capital, the latest metrics would suggest. A first-in-a-decade shrinking of that country’s foreign reserves are partially attributable to a sizeable capital outflow (some $34 billion) as folks fret about a possible hard landing and anticipate a decline in the yuan versus the US dollar. Standard Bank analysts also correlate China’s falling foreign reserves to gold’s action this morning, as follows:

"This morning release of Chinese foreign-exchange reserves might also be contributing to gold’s downward movement. This can be explained in terms of the negative effect that a slowing down in Chinese foreign-exchange reserve accumulation would have on global liquidity and the ability of governments, especially those of developed nations, to borrow."

The above is all the more reason to pay attention to reports such as the one issued by Barclays Capital this week, in which the correlation between the number of skyscrapers being built and the odds of a financial crash for a country is being made. Guess who tops the list of skyscraper projects in progress globally? China and India. Some of you may have heard of the billion-dollar residence of Mukesh Ambani. You know; the one that requires a bit more staff (600+) to maintain than Donald Trump’s crib does…

Barclays warns that "Investors should be most concerned about China, which is currently building half of all the tall buildings in the world, the bank said. A lending boom following the global financial crisis in 2008 pushed prices higher in the world’s second largest economy. In a separate report, the BBC reported that JPMorgan Chase said that the Chinese property market could drop by as much as 20% in value in the country’s major cities within the next 12 to 18 months."

Have a pleasant weekend,

Jon Nadler
Senior Metals Analyst — Kitco Metals

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.